AIG to keep $500B in controversial derivatives

AIG to keep $500B in controversial derivatives



NEW YORK (CNNMoney.com) -- AIG has decided to keep up to $500 billion of assets that have been widely blamed for bringing the company to its near collapse, according to news reports.

The troubled insurer changed its plans to unwind its entire derivatives portfolio, and instead it will maintain up to 25% or $500 billion worth of the assets, The Financial Times reported. The controversial derivatives tumbled in value when the bottom of the housing market fell out, bringing the company to its knees. Taxpayers stepped in with a $181 billion bailout to rescue the company.


AIG (AIG, Fortune 500) had previously planned to sell off 100% of its $1.9 trillion portfolio and close down the Financial Products unit that bought and sold them. The company wound down 28% of its derivatives portfolio in the first nine months of 2009. As of September, AIG had $1.1 trillion in the controversial assets.

But the credit markets are making a comeback, and the company reportedly believes it can take advantage of the upswing by maintaining a portion of its of its portfolio. By holding onto some of the assets, it believes it may be able to get a good return on its investments and pay back the billions it owes the federal government, the report said.

AIG also believes it has been able to eliminate risk from the assets it will continue to hold, and it received the blessing of its government overseers, the Treasury Department and the New York Federal Reserve.

According to the report, AIG has not yet decided whether it will allow a third-party fund manager to manage the assets, or if it will manage the portfolio itself. Either way, AIG still plans to close down the troubled Financial Products division by the end of 2010.

The Financial Products unit has been the object of much furor from lawmakers and the public. In addition to maintaining the derivatives portfolio, it was also responsible for writing insurance-like contracts on subprime mortgage-backed assets. Despite the unit's struggles nearly destroying AIG, the company still paid Financial Products employees retention bonuses of nearly $400 million.

source: cnn